Raghuram Rajan to force RBI focus onto Indian rupee, but analysts see plunge to 69

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Raghuram Rajan, a widely acclaimed economist, takes over as governor of the RBI from incumbent D Subbarao on Sept 5. (PTI) Raghuram Rajan, a widely acclaimed economist, takes over as governor of the RBI from incumbent D Subbarao on Sept 5. (PTI)
SummaryRaghuram Rajan may have been appointed new RBI guv, but worst is yet to come for Indian rupee.

Incoming Reserve Bank of India (RBI) Governor Raghuram Rajan will prioritise stability of Indian rupee over inflation and GDP growth, according to a Reuters poll which also showed the worst is not over for the rupee.

The Indian rupee has lost around 15 per cent to the dollar, hitting record lows almost daily, since the U.S. Federal Reserve hinted in May that it would soon begin paring back its massive economic stimulus programme, sparking an investor exodus from emerging markets seen as the most exposed to foreign funding.

Raghuram Rajan, a widely acclaimed economist, takes over as governor of the RBI from incumbent Duvvuri Subbarao on Sept. 5, at a time when the Indian economy is facing its worst crisis since 1990-1991.

Eleven of 17 economists polled said the Indian rupee will be the top priority for Raghuram Rajan but the consensus showed it will likely weaken to 69 per US dollar before rising, implying a further 7 per cent fall from Monday's spot rate of 64.10.

Most expected it to bottom out in September.

Indian rupee could plunge to 70 to US dollar soon, says Deutsche Bank

The Indian economy is caught in a quagmire of slow growth, high inflation, rickety government finances and a tumbling currency that is the among the worst performing in emerging markets.

"Raghuram Rajan could streamline the RBI's focus to stabilising the currency and inflation while being supportive of growth," said Nizam Idris, head of FX strategy at Macquarie Bank in Singapore.

"The RBI must realise it cannot control the Indian rupee, rates, capital flows and inflation all at the same time."

Most of the RBI's moves to break the Indian rupee's fall so far have not helped.

Since mid-July, it has tightened cash conditions which have failed to support the rupee, partly as Subbarao later said those measures were temporary.

Changing tack, it announced last week it would buy longer-dated bonds to lower borrowing costs, but that led markets to question the RBI's resolve in defending the currency.

Even Rajan's appointment earlier this month failed to calm markets and the Indian rupee rallied for only a few hours after the announcement.

Analysts, however, said the RBI will likely make some important changes under the new regime.

While most expected greater focus on the currency and prices, a few economists said the RBI might begin targeting an inflation level while bringing the consumer price index into the realm of policy

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